FHA Home Loans in North Carolina are generally used by folks who are either new to the home buying market, or those who have unusual circumstances, requiring more “common sense” mortgage eligibility requirements. Recently, FHA changed a long-standing eligibility requirement that dictates what collection accounts must be satisfied prior to being approved for a FHA Mortgage Loan in NC. The new guidelines (regarding what collections must be paid to get a FHA Mortgage Loan) will most likely effect credit challenged buyers, and home buyers with lower credit scores who are looking for a way to buy a house in NC.
The new eligibility does not really affect the minimum credit score requirements for FHA Loans. We can still make loans for folks with at least 2 credit scores over the 580 mark (with some noted exceptions – for instance the down payment can not be a gift).
However, for home buyers in NC with collections totaling over $2,000, FHA now requires lenders to include monthly payments in calculating eligibility, for the first time. While some collections report a minimum payment on credit reports, most do not, and lenders will assume a payment of 5% of the outstanding balance.
Now, this collection requirement does NOT mean you have to pay off Medical Collections. THOSE Collections are not calculated and underwriters for the most part do not require that they be paid.
What Collections Must Be Paid To Get a FHA Mortgage Loan
What collections must be paid to get a FHA Mortgage Loan? Again, the good news is that Medical bills are exempt from the mortgage eligibility guidelines, but old credit card accounts, utility bills, and other liabilities must be included if listed as a collection on credit reports. Underwriters who traditionally didn’t look too hard at collection accounts, will have to be vigilant to ensure they correctly calculate clients’ debt ratios.
Because so many collectors do not show a payment amount, we strongly suggest that home buyers begin a plan with a creditor, and get that payment amount verified in a letter. Most Underwriters are going to want to see at a MINIMUM 3 payments made on the collection account – and some underwriters might require 6 monthly payments made. Some of these payments are only $7 a month others are $200 a month…
Adding the assumed payments will raise buyers’ debt to income ratios. The DTI eligibility ratio for down payment assistance mortgages is now 43.00000% – so this additional monthly payment could reduce a home buyer’s purchasing power, and potentially prevent some from buying their dream homes. However, FHA (let’s say you have the down payment or can get a gift),
Guidelines for loans with minimum credit scores under 640 are underwritten manually, and the guidelines required for collection accounts for those folks are even more stringent. Underwriters will have to determine if the account resulted from a “borrower’s disregard for financial obligations, inability to manage debt, or extenuating circumstances.”
For Home Buyers with minimum credit scores under 640, the minimum payments must still be added to debt ratios, whether the collections total $2000 or not.
Many people mistakenly think when a debt has been charged-off that it’s been cancelled by the creditor. This is not true. You are still responsible for paying off the debt. However, you will not be able to use your credit card to make purchases, because when a company “charges off” the debt you owe them – they are FOR SURE going to cancel that card! That balance could ALSO show as a Collection account.
Things that COULD hurt your credit scores? Disputing all of the items on your credit report! A collection is not gong to bring your credit score down nearly as fast as missing car payments or missing student loan payments – but there’s no doubt a hit to the score.
The current Urban “myth” is that you can simply dispute items on your credit report – and they will have to take them off – is just that, a Myth. Now, if you have LEGITIMATE incorrect information – then sure, your should dispute that information. But just disputing everything on your credit report to try and get a higher score isn’t going to do you much good.
In NC we have a term you may have heard of, “let sleeping dawgs lie…” If there’s an old Collection on your credit report, and it’s under $2000 – I’d leave if alone. The minute you start “negotiating,” the Creditor will update the date of last activity – and your score drops again.
We still advise home buyers to contact us early in the home buying process. Because not ALL collection accounts will be under this new underwriting criteria, you need a loan officer who will be willing to work with you to determine which accounts need to be paid, and which ones need to have payments set up.
If you are interested in buying a house in NC, and you have questions about the minimum credit score requirements for a FHA Loan or what What collections must be paid to get a FHA Mortgage Loan – call Steve and Eleanor Thorne 919 649 5058. We offer the best mortgage rates and we offer all of the NC First Time Home Buyer Programs.